Gold Sparkles, But For How Long?

There has been much interest in the media over the past year regarding gold as the bullion price per ounce has gained nearly 30% this year.  As a result, investor interest in gold has increased as a diversifier to portfolios because many view this as a "safe haven." Gold is a “fear” asset class, and uncertainty in almost every risk asset class has intensified gold’s price increase.  Much of the gains this year can be attributed to growing uncertainty surrounding U.S. Treasuries and European Sovereign debt.  Investor demand has also increased because the asset class has become more accessible through new products such as ETF’s (Exchange Traded Funds). 

In the past gold has shown itself to be a good hedging instrument against inflation and a weakening dollar and tends to have almost no correlation to stock and bonds.  Other investments also serve as a potential hedge against inflation and a weakening US dollar such as TIPS (Treasury Inflation-Protected Security), commodities, and foreign currency bond funds.  Naturally, gold has been part of our research efforts on this front.  The run up in the price of gold over the last few years is a concern to us (see chart below). 

The cost to extract gold from the ground is roughly $740 per ounce.  With gold trading over $1,882 per ounce as of 9/2/11 that is a $1142 premium.  This could indicate a supply and demand imbalance and perhaps, panic or speculative buying.  Gold’s price has often been driven more by speculation or its role as investment portfolio “insurance” than by fundamentals.  As a result, gold is subject to market risk. 

Sources:

No-Load Fund Analyst July 2009

Geoff Considine Ph.D., Advisor Perspectives, Sept. 2010

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James.  Investments mentioned may not be suitable for all investors.  Past performance may not be indicative of future results.  Gold is subject to the special risks associated with investing in precious metals, including but not limited to:  price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

Investing Against Human Nature

“The loser is the trend-chasing, comfort-seeking investor. The market doesn’t reward comfort. It rewards discomfort.”  Rob Arnott

The above quote brings to mind a book I read recently, The Little Book of Behavioral Investing by James Montier. It attempts to describe in detail why we are our own worst enemies in investing. 

Human evolution has dictated much of our decision making process and emotions.  In modern society we don’t have to play the predator/prey game of survival on a daily basis.  Yet much of our instincts are based on this survivalist mentality developed hundreds even thousands of years ago. 

Contrary to when it was safer to go with the herd, a safety in numbers mentality can be detrimental when applied to modern investing.  Enter the discomfort.  Going against the grain when it comes to investing can be very scary, for example funding your Investment accounts when you’d rather throw a brick through your financial advisor’s window; however, it is generally where the best investment returns come from. 

Having a sound investment process in place to identify opportunities and maybe more importantly to avoid “knee-jerk” reactions is critical in investing.    Process, in an uncertain world, is one of the few things we can control.  Just as important as the process, is the time that must also be taken to reflect on your process when you are most successful and not necessarily when you are making the most mistakes. 

Investing involves risk and you may incur a profit or loss regardless of strategy selected.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.